Venture Capital

Anybody whose watched dragon's den should be familiar with the concept of venture capitalism. It essentially means that rich people take a punt in your startup company by pumping in cash in return for equity. Since investing in startup companies is high risk and the government wants to encourage startups by providing them with a means of obtaining cash, the UK government encourages venture capitalists by offering tax reliefs on venture capital trusts. Currently, you don't have to pay income tax on the dividends from your investment or capital gains tax when you dispose of your investment.

With the tax relief, you'd imagine that venture capitalism is a great idea. However, you need to bear in mind the failure rate of startup companies and also the length of time that it typically takes for a startup company to turn a profit. Most startup companies attract venture capital in rounds, with milestones set to conclude a round and go on to the next round of attracting captial. Dragon's den is example of the seed round (1st round of financing). At this stage, it's usually the inventor/entrepreneur presenting a viable business case and attracting no more than £3m of capital in return for 30-40% of the company.